These 4 Measures Indicate That Jiangsu Zeyu Intelligent PowerLtd (SZSE:301179) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Jiangsu Zeyu Intelligent Power Co.,Ltd. (SZSE:301179) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Jiangsu Zeyu Intelligent PowerLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Zeyu Intelligent PowerLtd had CN¥304.6m of debt in September 2024, down from CN¥447.5m, one year before. However, its balance sheet shows it holds CN¥2.10b in cash, so it actually has CN¥1.80b net cash.

How Strong Is Jiangsu Zeyu Intelligent PowerLtd's Balance Sheet?

We can see from the most recent balance sheet that Jiangsu Zeyu Intelligent PowerLtd had liabilities of CN¥772.9m falling due within a year, and liabilities of CN¥2.14m due beyond that. Offsetting these obligations, it had cash of CN¥2.10b as well as receivables valued at CN¥299.0m due within 12 months. So it can boast CN¥1.62b more liquid assets than total liabilities.

This excess liquidity suggests that Jiangsu Zeyu Intelligent PowerLtd is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Jiangsu Zeyu Intelligent PowerLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Jiangsu Zeyu Intelligent PowerLtd

But the bad news is that Jiangsu Zeyu Intelligent PowerLtd has seen its EBIT plunge 19% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jiangsu Zeyu Intelligent PowerLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Jiangsu Zeyu Intelligent PowerLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Jiangsu Zeyu Intelligent PowerLtd reported free cash flow worth 9.5% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Jiangsu Zeyu Intelligent PowerLtd has CN¥1.80b in net cash and a decent-looking balance sheet. So we are not troubled with Jiangsu Zeyu Intelligent PowerLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Jiangsu Zeyu Intelligent PowerLtd (of which 1 is significant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.